How to figure military retirement into plan?

[SonnyJim]

Howdy All, I have been lurking for several months. I have used the search function and cannot find the answer to "How is your military retirement figured into the FIRE Calc."

I have 10 years in on active duty and plan on retireing at 20 with the rank of CAPT (0-6). How should this be plugged into the system.

I am in the early phase of planning (I guess it is a bit too late, but it is a start) I am 2 months away from paying off over 120K in student loans and will be totally debt free (i am renting at the moment) I have about 50K non retirement and 50K retirement (IRA, TSP). 5 and 7 year old sons and a great wife.

I would love to be able to just stop working at 20. I will get 60% of my base pay at 20 years, today that would be about $4500 per month. I will be 47 years old then and health ins should be covered for me, not too sure about the wife and kids.

I will have many more questions, just looking for a place to start.

Thanks for your help,

SonnyJim

 

[Nords]

Well, it's never too late to start...

But, uh, Jim, you're not gonna have many problems to solve here. Military & civil-service retirements have eliminated most of the typical ER obstacles. $54K/year, with a COLA & TRICARE, is about twice the income of some on this board. Quite a few don't have COLA & healthcare solutions like this, either.

I'd keep maxing out the TSP & IRA, especially raising your contributions as the limits go higher. (For example, next year's TSP rate is at least 10% plus bonus & specialty pay, and IRA limits are going up too.) Sock it away in a Roth if you're eligible or, after retirement, convert from a conventional to a Roth (long before RMD).

Save as much more as you can in taxable accounts-- frugality without deprivation. And if you can survive on your current pay, then put the entire pay raise in savings. The jumps from O-4-->O-5 and up to O-6 are particularly tasty savings boosts, but keep putting those annual pay raises in savings too. Every time you can forego a vice/luxury for savings means that much less work after military retirement.

When your debts are paid off, saving 10-12% of your GROSS income should be no problem, and perhaps even 25-30% is achievable. Heck, if you're a submariner, your quality-of-life standards are so low that you might be able to exceed even that.

If my career was any indication, very few of your fellow officers will even be able to comprehend a jobless military retirement. A few will think you're a hapless bozo for putting yourself out to pasture during your "prime earning years". The peer pressure you're gonna face is "Well, now that you're an O-?? you're going to have to drive this, live here, and do (whatever)." My response in those situations was along the line of "My car reflects my values, not my paycheck!"

Track your expenses and keep reading the board to estimate how much you'll be spending in retirement. Strive to build a total retirement portfolio of 25x your annual after-pension expenses (e.g., ~4% annual withdrawal rate). And perhaps you'll be saving for a couple college funds, too, although there's a considerable variety of opinion here on how much parents should be responsible for kid's college educations.

Your wife will be covered medically as long as she's carrying a military ID. Your kids, too, although that varies with their student status, and I believe that cuts off for good after the age of 23 (I know it's more than 18 but I'm not sure how much more).

A good place to start is William Bernstein's "Four Pillars of Investing". There are many others, but this one explains it clearly and factually. It'll help you answer the questions about where you should be allocating your assets and in which funds.

As for FIRECalc, GDER or Dory may have better answers than mine, but I'd start by checking the pension-withdrawal box that says "Check this box to use inflation-adjusted dollars".

 

[unclemick]

On the other hand, I bent my nephew's ear(age 30, navy hilo pilot) long and hard - if you have doubts go with Bogle - even though he's reading Four Pillars - it's the rage now. After three middle east go - rounds got tactical reserve so they plan to buy a house.

Biloxi wife, 32 foot Creola, avid reader of Jimmy Buffet - They'll do just fine - whether Bogle or Bernstein. We didn't talk ER - but the handwriting is on the wall.

BTY - good post as usual by Nords.

 

[SonnyJim]

Wow, Thanks for the info. GDER you were right, I am a dentist so we have a pretty easy time of the promotion process 0-6 at 20 is expected or you're out. Also, they count my 4 years of dental school towards retirement so I will get the additional 10% (2.5% per year). If I retire at 20 I will get paid at 60% of base pay for 0-6 over 24. It is a pretty good deal if I can hang in there long enough. I heard the Navy will be RISing about 100 dentists. So I will be watching very closely. And this is the $64,000 question. It is a non-contributory retirement all-or-none kind of thing. If I get RISed at 15 years I get nothing.

 

[JDARNELL]

Very interesting thread. I have some prior service time and reserve time so I will retire as either an 0-4 at 20 w/23 yrs for pay or maybe 0-5 with a little more time. My board will meet 18 mo before I am eligible to retire so if I made it I would have to stay. I am sure the situation will dictate when I leave even though I have certain times of the year in mind. No matter what happens it will all work out. My earliest departure date would be 1 Jul 2010.

I have built a couple of spreadsheets that allows me to take into consideration the impact of the high 3 pay along with time in service/rank and some other variables. I use it in conjunction with another spreadsheet that allows me to change asset allocation, rates of returns, and withdraw amounts. It is very interesting. I have run the numbers several times and really feel I am clean on the finance side. My goal was always to have the same level of take home pay before and after retirement. Pulling from investments I think I can make up the loss or AD pay at retirement. House will be paid off in 4 yrs so that helps also. Having a house paid for is gravy.

What is interesting for me is the emotional process ERs go through. Most military folks I know are type A and have a hard time transitioning. I have a lot of retired 0-4s and 0-5s that work for me. Some transitioned jobs over the weekend, others moved then found a job, and others moved for the job. Seems like a lot of stress to me. Most said they wanted to so something completely different but doing the same type work was the easiest and paid the most. Makes sense but I really am not interested. In all of these cases they were not financially prepared to take the chance on something else. I tell them that I want to completely hang it up and they all think I am nuts. I recognize I will do something but I don’t want to get into a situation where I have to so something.


As a side note when folks retired did they establish some “rules” of things they would and would not do? (ie no big ticket items for a period of time)

Tomcat98

 

[JDARNELL]

Hey GDER,

Good point on what to compare before and after retirement as far as income. I have thought about not saving anymore but hadn’t made the connection with reducing amount I would want to have each month.

Thought a lot about SWRs and have considered taking a higher amount in good years and a lower amount in bad years. (I might want to establish some guidelines on this ahead of time to take out the emotions- need to think about it some more.)

Would really like to develop a cash buffer of the delta of what I want each month over military retirement multiplied by X number of months. That way no matter what happened I could still continue as normal. I would take SWR withdrawl amounts and add them back into the cash once a year and re-average them over the x number of months. Would help with income fluxuations and also by varying the months alter the amount for good times and bad. If I am under my spending estimates I will simply add more months cushion. This might sound complicated but running the numbers is seems painless.

As for purchases there will probably be a new car near retirement day so we have a reliable mode of transportation for those Chevy Chase cross country trips. Will keep the current one for the MAC terminal or the longterm airport lots.

CINC house & I will be in our early 40s and the kids will be 12 & 10 so I expect more expenses in food, sports, activities, etc. Commute cost will go down but I am sure the entertainment will go up. But hey that works.

I really want to make everything as automatic as possible so I dont do something off the wall on a whim.

 

[Nords]

"Military ER is not for sissies"...

Tomcat,

I'm gonna go way out on a limb and speculate that you're an aviator... I've always thought F-14s had the last good logo.

Besides GDER and myself, I only know of two other people who were able to swing military ER. (And they both bag groceries occasionally for extra spending cash.) None of my shipmates or college classmates have seen the light and some of them never will. You won't learn about REAL retirement at TAP or from any of your workerbees. I've often wondered if GDER and I should start a support group for "recovering military retirees"-- but it sounds too much like work.

A couple career comments; my apologies if I'm preaching to the choir. First, if you're selected 18 months before retirement then you still have the right to request retirement at your current rank. I've seen it done to avoid detailer's "offers you can't refuse". BUPERS' attitude is that if you're an O-4>18 then you're deadwood not worth wasting transfer money on. If, however, you morph into an O-5 then you have another career decade ahead of you and it's the detailer's job to find you the most challenging character-building assignments for liferdogs. Detailers have a book that tells them all about O-5s trying to "retire on active duty" and they won't let you get the time in grade without incurring additional bloodshed. Second, if you get within six months of PRD and haven't submitted your retirement request, then the detailer is allowed to issue transfer orders with a two-year minimum activity tour. (Not that they'll tell you this, but it's in the transfer manual.)

Perhaps you should build that spreadsheet on O-4/20 and regard anything after that as an unexpected bonus. It has the additional benefit of not holding you financially hostage to your community manager.

My spouse claims that I'm worse than type A (I'm a nuke) but I prefer to think if it as "highly capable of directing my own entertainment." I believe that 90% of military retirees are financially unprepared and another 9.999% are emotionally/mentally unable to fend for themselves without the structure of the workplace. I've even seen a couple of the "chronically depressed" category who are financially independent yet ditched retirement for the "comfort" of a job. While you may be type A, if you can't imagine yourself working then you'll have no problem finding things to do. Better yet, your kids will find them for you.

If you're shopping around for retirement calculators, Financial Engines has an extremely detailed one (it showed me what I'd overlooked) with a Monte Carlo simulator. Unfortunately it's not free but the cost may be worth the persuasion. If you haven't already done so, you should produce your own extremely detailed budget (including capital expenses like a new roof, new appliances, replacement cars, kid's wedding, and a fantasy vacation or two). Once you're confident of the expenses, try to build a portfolio at least 25-30x larger than the expenses not covered by your pension. That will give you an average 3-4% SWR.

My pension covers the majority of our expenses so we feel comfortable with a 100% stock retirement portfolio (one mutual fund, some ETFs, and some individual stocks). Because we're not DCA'ing, our expense ratio is only about 0.6% and dropping slowly. We keep a couple years' expenses in cash to smooth out the market's down years and we're building a CD ladder.

GDER has more experience than I do, but I've been surprised by how much our taxes dropped. I was also surprised by how sleep-deprived I was at work; terminal leave was filled with two-hour naps and I didn't really settle into an all-night sleep cycle for over a year. And hopefully your spouse/kids will keep you active because it's way too easy to bloat when you don't have to meet the physical-fitness limits.

My only rule was to not learn how to surf until AFTER I was no longer required to show up for work. That turned out to be a smart move. Another thing that's surprised me is how busy life has been. I'm a parent and I've always enjoyed home improvement but I still don't have enough time to read, surf, and play blackjack in Vegas. The difference is that I can take a long-term view now and I'm sure that it'll all get done someday.

 

[unclemick]

You guys are right. Off the top of my head the 4-5 guys with military pensions I can think of - not one could be classed as a ER - most worked into their 60's and one late 50's is on partial disability of some kind.

 

[samclem]

GDER, Nords et all,

Howdy. I'm still on active duty, but looking longingly over the fence to the field you're in. Some days more than others

(Note to the non-military retirees--this is about to get get really boring)

The different services have different rules/waivers regarding promotion and retirement. For example, a few years ago the USAF eliminated it's active duty service committment (ADSC) for pinning on Lt Col and Col. So, there's no "contract" keeping you in the service just because you accept the rank. But, you can't retire in that grade unless you serve a certain amount of time (2-3 years). And--I think this is all separate from the retirement pay situation--that is--for folks under the high three system they still average the last 36 months of pay you actually received. So, conceivably, you could pin-on O-5 and retire the next day--as an O-4. Or, you could wear it for 18 months, then retire (as an O-4) but with (nearly) 50% of the retirement pay plus-up you would have received by staying the full 3 years as an O-5.

This board is great!

VR,

samclem

 

[Nords]

Disclaimer for young dreamers

SamClem,

Yep, Navy uses the same rules. But some of the harsher detailing policies at the higher ranks make people wonder why they worked so hard to be promoted in the first place. I have to conclude that promotion past 0-4 is not an award for faithful service-- it's a challenge to see if you have what it takes to go 30 & flag, and it's a vicious Darwinian struggle.

I know that I was blissfully ignorant of most of the fine print (& unwritten "detailing policies") until I was in jeopardy of failing promotion. I suddenly realized that I was supposed to be in charge of my career/life and that no one else would care. Those years resulted in a real transition to adulthood and probably some of the most productive PERSONAL financial/career planning that I've ever achieved.

Jarhead, posts like yours make me realize that the military pay system has made tremendous strides in the last five years. It looks like it'll be indexed to the ECI for some time, and I think we have the bull-market '90s to thank for eliminating the conscription mentality.

But for all you young dreamers thinking about calling a recruiter, keep in mind that a military career requires hard family decisions. I've always wondered how the military divorce rate compares to the civilian one, but I'm sure it's at least 25% higher. Even with a stable marriage, your career decisions affect your kid's lives. Kids are amazingly resilient and they don't miss what they never know, but you'll know. Although the retirement looks pretty sweet when you're sitting on the assets, a half-dozen shipmates didn't survive to enjoy them (or even worse, survived their injuries to achieve disability retirement). I'll always be asking myself what I could have done differently to stop three different suicides that caused additional deaths and destroyed a dozen families.

So post questions or PM one of us retirees before you sign anything!

 

[samclem]

Nords and GDER,

Thanks for the welcome. You guys are helping more folks than you know.

Ditto on the "notes, warnings, and cautions" concerning military retirement. It is a very attractive benefit, but one that is almost always well earned. Moving the family every 2-3 years (to places often not of your choosing) takes a toll on the strongest families. In many cases, the long hours are tougher still (my wife just laughs now when I start the sell job on the next assignment--"It won't be like the last job, the hours here are gonna be 7-5, and hardly ever any callups or weekend work, no beeper I'm sure."). The deployments. Some jobs are dangerous. Part of the reason for the 20 year retirement is that most folks are damn well worn out by that time (in my opinion). Not too worn out to enjoy life, but not fit to lug a ruck, do 48 hours straight duty in a battlestaff, etc. I would discourage anyone from joining the military for the retirement--you'll spend your years looking down a road that will seem interminably long. Join to work with the best folks you'll ever know and to do a job that needs doing--and fight hard to get into an AFSC/MOS/rating that you'll enjoy for the long hall.

I've heard folks say that the retirrement pay is really just deferred overtime pay--that might not be far off.

Great to be here with yooz guys!

samclem

 

[otako]

I'm currently in rotc and about to embark on military career in the Air Force. I personally think moving every 2-3 years is exciting. If your not tied down with family, you adapt quickly to moving often.

 

[JDARNELL]

Hello Nord,

I knew at some point someone might make that assumption that I am a Tomcat driver but I am not. User name came about for after my son and the year he was born. I am actually an Air Force acquisition officer with 4 years prior jumping out of planes for the Army. I saw those guys at Pope AFB with there hands in their pockets and decided that was for me. I now work on trying to hit big missiles with bigger missiles. All defensive of course.

I see those guys bagging groceries at the commissary. I remember my days bagging as a teenager. It was fun then but now I am not sure

As for the spreadsheets I have built, they are built on the 0-4 averaging the high 3. As SamClem point out making 0-5 just averages out one month 0-4 and in one month 0-5 pay. Currently we are not required to stay a period of time, but I think it is 2 years to retire in grade. It is my guess people will not care if I am an 0-4 or 0-5. I do not plan to sign my signature with USAF, (Ret).

As for budgeting we currently track everything in quicken but I must admit I want to drop that workload once I hang it up. I think I will go to a zero based budgeting approach. I hope to get my SWR down into the 2.5% range and just use an ATM card replenishing the account when I need to.

You mentioned you are putting in a CD ladder. Can you expand a little on how you plan to incorporate this idea? I am toying with a 70/30 or 65/35 asset allocation of stocks and fixed income. If you think about it in conjunction with Uncel Sams P-nut butter money this is really very conservative.

As for sleep deprivation, I know what you mean. Sometimes I am up in the middle of the night because I have work on my mind. Bad Habit! As for bloating I have thought about that also. This winter I was TDY about 2 weeks a month, studying for Intermediate Service School, and going out with friends that are located in DC every night I was there. Put on 7 lbs. Said enough is enough and have really hit the exercise routine. Weight has not come off its turned to muscle. CINC house went on a diet/exercise program over the winter got back down to the range she was when we were dating a decade ago and is prettier than ever. She is a Hammer! Now that is incentive.

Being a type A, I am always saying I have this 10+hr hole in my day called work that keeps me from doing things I really want. Big Poker player, like to fish, fly space a whenever I can, spend time with my boys, would like to turn my air guitar into a real one and bone up on Van Halen, AC/DC, Lynard Skynard (?), etc., and do whatever for a while. Might even follow those NASCAR drivers for a while as well.

GDER mentioned he would like to find a kindred spirit w/o rental property. I have a couple of those things with 3 yrs of my salary equity in them but I have not included them in my plan.

OTAKO mentioned he thought moving every few years would be exciting and it has been ok for us when we did move, but IMHO it sometimes gets in the way. For the soon to be new LT., my advice is Plan your work and work your plan. Time will fly by and when someone tells you no ask someone else. Someone has to take that good job or go to that good location. AD is what you make of it. It is a blast for us!

Tomcat98

 

[Nords]

"Pronounced Lynyrd Skynyrd" (debut album?)

Sheesh, am I the only Navy/nuke who's able to hack the ER lifestyle?!? Ah, well, I'll get over it.

Otako, I moved more frequently than that for the first five years of my career. Six-month schools for two years followed by three years on a ballistic missile submarine-- offcrews in Charleston, SC and patrols out of Holy Loch, Scotland. I packed up the condo every three months, lived inport for 25 busy days, and then put to sea for 90 more. This was back when the Cold War made you feel like you had a real mission. (As an aside, TomCat, as happy as I am to be living in today's post-Cold-War world, I don't know how you maintain the will to live...zzzzzz)

And you're right, moving is exciting. Until you pick up additional things to move-- a spouse (maybe with their own higher-paying career that doesn't transfer so well), a kid, a pet, aging parents to care for, maybe more kids. So enjoy your career as long as there's excitement. When your personal excitement shifts from career to family, then it's time to take a good hard look at the Reserves.

Hey, it's been at least five years since I've bolted upright from a sound sleep at 2 AM snapping out the orders to recover from a reactor scram. And the nightmares have almost stopped.

TomCat, the O-4 money assumption should work just fine. And I'm still using my old calling cards for scrap paper. You might find that the Quicken burden isn't so bad in retirement since you'll be doing about the same data entry but might have the curiosity & time to explore many "what if" scenarios. I've kept the Quicken up for over 12 years now and our 11-year-old kid balances the checkbook & tracks spending. So you could always try outsourcing the tasks in the name of good parenting. I can tell that you have enough interests to someday wonder how you ever found time to go to work.

The cash stash is an evolving tactic. We've been 100% stock since we started investing but we realized in 2001 (a year from retirement) that bonds were not going to be a good source of retirement income. We kept a year's expenses in cash and decided that might work better. Bernstein's asset-allocation belief in bonds shook me up for a while but Frank Armstrong endorses a stash. We haven't made up our minds either way but we now keep two years' expenses in cash-- one year in a NFCU MM certificate and another year in a NFCU one-year CD. As spouse's paychecks are deposited, my hobby stocks are paying off, and our expenses are dropping, I'm gradually adding more years of expenses to the stash and stretching out the CD maturities. A five year cash stash may be overkill but three or four seems fine.

You'll have to occasionally share your landlording experiences with the rest of the board, especially for the benefit of the ER real estate wannabes. I think John Galt and I may be scaring too many people out of the business...

 

[JDARNELL]

Charleston SC? I have in-laws there. Nice place but hot in the summer.

Well I was up last night at 0200 thinking about work and how far behind we are on a couple of things. I even considered getting to the PC and sending the tasker for a status review Monday. But I found a good western that filled the next couple of hours. I still have a large amount of use or lose leave to get in as well.

Outsourcing the data entry function is a good idea. I get a lot of those from this board

I have long term leases on my rentals and it works out ok. I will let them go month to month but it comes with a 35% premium if they desire. Flexibility cost you know. I have one unit that I really like (cash flow is pretty good) and the other I am not so hot on but it is a cash cow. I'll milk that puppy til I can't no more then move on.

In one post someone mentioned how low there taxes were now that they are retired. I have been playing with the on line turbo tax program entering our info and they are right. Ours would go down dramatically.

Tomcat98

 

[Nords]

Jarhead, the question occurs to me...

... does the retired flag officer sit on any corporate boards? I don't mean charities or non-profits (although some of them can be pretty profitable), but flag messes like General Dynamics or USAA.

I agree that type of "job" is hard to distinguish from retirement, but it certainly jeopardizes his ER membership.

 

[John Galt]

Hey, wait just a minute Jarhead. My ego is pretty
massive and I'm successfully retired. But, I can still
laugh at myself. Maybe that's the difference.

Anyway, I agree with you that most successful retirements have little or nothing to do with finances.

JOhn Galt

 

[unclemick]

Yep

To repeat an old post - my successful ER was an accident.

Shooting for age 63 - layed off at 49, didn't want to move out of town with 15 yrs of stuff, she had 1 1/2 years to nail her pension breakpoint, and after looking for job, it slowly dawned
that we were doing just fine. That was 1993. In 2003 discovered this forum and realized I was an ER the whole time. Next stop - curmudgeon rank - ? what's the promotion prospects?

 

[John Galt]

Hello ex-Jarhead. I am fortunate to have several friends like your neighbor/golfing buddy, i.e. I know
I can call on them anytime and they would do about
anything for me. Re. being a powerful guy and then
dropping out, a short anecdote:

If I am away from the house for a day, or on a trip,
when I return I ask my wife if I had any calls, messages,
visitors, etc. She frequently says nothing happened.
My standard response is
"Nobody called, nobody stopped by!!! What am I,
chopped liver?? When I was working, if I said
'JUMP', people said 'How high?'. Now I am just ignored."

It's a joke and my wife finds it quite amusing, but the
world and its citizens seem to go right about their business whether I am involved or not.

John Galt

 

[Nords]

Damn, I'm impressed.

Jarhead,

Please pass on my congratulations to your friend. It takes a special person to join the military, an exceptional one to make it a career, an amazing one to stick it out long enough to reach flag rank without being detected as a closet ER, and a unique one to leave it all in the shadow box!

It renews my faith in military ERs. Maybe it's not oxymoronic after all...